Swiss Re to cut back on P&C, but positive on re/insurance industry trends

Global reinsurance firm Swiss Re believes that the long-term outlook for the re/insurance industry is positive and that growth potential, in what it terms risk pools, will provide it with attractive opportunities to allocate its capital to.

This is despite the challenging re/insurance market environment, which Swiss Re acknowledges, with pricing pressure across many reinsurance and primary insurance lines, low interest rates, a less stable political environment and regulatory change.

However those challenges that it sees lead the company to explain that it will further pull back on allocation of capacity to some property and casualty insurance or reinsurance business, while pushing deeper into life and health.

It is interesting that P&C is seen as the area to pull back more, considering the firm grew its P&C reinsurance premiums by 81% in 2016, over 2015. The company remains a large player in some of the most softened property catastrophe markets, so it will be very interesting to see where the pull back occurs.

Holding its investor day today, Swiss Re reveals more of its strategic thinking and no surprise to see that it is the company’s ability to access understand and price insurance risks, alongside its strong capital balance-sheet, which are highlighted as the key differentiators.

Christian Mumenthaler, CEO of the reinsurer, explained “We acknowledge significant challenges in some of our markets but we remain optimistic for our industry in the long term. In the current environment, it is absolutely essential that we focus on what we do best: leverage our capability to price risk and allocate capital to those opportunities that are most attractive.”

The company feels that these attractive opportunities, the risk pools of which it has identified over 40 different ones, are set to grow and that is why it remains positive on the long-term outlook for the sector.

However the pull back that has happened in some areas of property and casualty risks is set to continue at Swiss Re. At recent renewals the company has continued to underwrite many areas of the property catastrophe market, for example, where others have already pulled back significantly. So perhaps that is one area the firm is beginning to lose its appetite for.

Mumenthaler continued; “This means we will continue to focus on our disciplined underwriting approach and further cut our capacity in some property and casualty businesses. On the other hand, we will invest more in life and health businesses.”

The confirmation of a further pull back in some property and casualty lines of reinsurance could signal a realisation at the firm that some areas of the market are unlikely to meet its return requirements going forwards. With making cost of capital key, there are now some risks where even the largest and most diverse reinsurers cannot continue to expand into them.

It will be interesting to see how this plays out though, as large globally diverse reinsurance firms like Swiss Re have been underwriting some catastrophe peril regions at increasingly low rates, so low that the insurance-linked securities (ILS) market won’t even try to compete for them.

It would actually be healthy for the market if those regions, we’re thinking some European property catastrophe programs and perhaps Japan too, were allowed to tick up a little in price. But the large reinsurers do need to maintain some diversity and we’d be surprised if the pressure from traditional capacity came off much in these regions.

But any pull back in P&C re/insurance could provide an opportunity for the ILS fund managers of the world to access more risk, if they are risks that meet their return requirements. But if the pull back is in areas where traditional capacity has already dominated then ILS and the capital market is unlikely to look to replace it, as the rates in these areas have already been deemed to low by most ILS funds.

Could that result in an increase in price, or will other traditional capital take the opportunity to diversify further into regions where the likes of Swiss Re has dominated, keeping the pressure on. Time will tell.

But Swiss Re remains positive on the future potential for its business, despite the anticipated pull back in what would have previously been core areas of its portfolio.

The company explained; “Swiss Re is convinced that the long-term trends for the insurance industry are positive. For example, risk pools will continue to expand based on rising GDP in the world’s economies and demographic trends. Insurance penetration levels are still low in many parts of the world, especially in high growth markets. Technology in particular will help to close protection gaps worldwide by providing better, more efficient and cheaper offerings.”

Swiss Re is investing in research & development to help it to access more of these growing risk pools, with technology and insurtech investments likely to be a key avenue of strategy in the coming years.

This will help the company to continue to position itself as trusted partner to its clients, as the provider of risk sourcing, analysis, pricing and capacity.

“By placing even stronger emphasis on serving as the knowledge partner to our clients and by investing in those risk pools with the most attractive returns, we will be able to set ourselves apart,” Mumenthaler said.

This is no easy task though, with a traditional reinsurance balance-sheet and shrinking reliance on the capital markets as companion underwriting capacity.

Many other reinsurers have set up efficient, third-party capitalised pools of capacity to enable them to continue to play a role in areas of the market where returns do not meet their own cost-of-capital, but Swiss Re has so far shied away from going all in on the capital markets and has in fact pulled back in recent years.

Even the companies use of the capital markets for retrocession has shrunk, with catastrophe bonds not renewed and its Sector Re collateralised reinsurance sidecar having shrunk over the last few years.

Is this the right strategy, to place full reliance on its own capital base at a time when the returns from insurance and reinsurance underwriting are only set to become slimmer, as technology and new business models, alongside efficient capital, make the risk transfer product cheaper?

Swiss Re will seek to differentiate itself by focusing on becoming a key risk taker that enables the growth of the re/insurance market and the narrowing of protection gaps. It’s clear that the company sees significant opportunities to continue down its path of specialising, moving into more corporate insurance risk areas and investing heavily to better understand the contents of these risk pools as they grow, in order to put its own capacity to work increasingly efficiently.

Mumenthaler explained; “Building up knowledge and centres of competence through R&D has been in our focus for a long time and we have created an enormous amount of value. With the Swiss Re Institute, we expect to accelerate this and we believe it is virtually impossible to replicate this knowledge base within a reasonable time frame. This provides us with a competitive advantage and a strong base to aid in making the world more resilient.”

At some point in the company’s future it will be interesting to see whether Swiss Re does begin to welcome more third-party capital into its business. While the reinsurer states it will continue to return capital to investors, where it cannot be profitably deployed, if it could earn fees for managing investors money and still deploy it into areas where it otherwise would have pulled back, wouldn’t it make sense to do so?

Given the expertise at Swiss Re, the company is undoubtedly one of the most highly regarded in the risk transfer space, third-party capital could help it grow and maintain footholds in re/insurance markets which are now permanently softened to the point where its equity capital is no longer an efficient source of capacity.

In the last few years the company has not taken this approach, when so many others have.

With efficiency set to ramp up in reinsurance, thanks to enhanced analytics, big data and the application of insurtech, while capital efficiency within the value chain is on the increase, it will be interesting to watch whether that strategy changes over the coming five years, as the market looks set to remain pressured and ILS capital likely to grow.

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